How does pulling money out affect cash flow?

Question

So I've been stuck in analysis paralysis for a while now and I'm finally at the point of pulling the trigger, but I'm still hung up on one thing. I hear a lot of people say cash flow is dead, you can't BRRRR with today's rates, etc. I've been analyzing properties daily in locations I'm interested in investing to get practice and the properties I'm looking at cashflow on paper (yes, with maintenance, vacancies, capital expenses, and PM factored in). The properties I'm looking at wouldn't even necessarily require a BRRRR, but I know I'll do some upgrading and want to refinance eventually.

But I'm clearly missing something which of course is giving me pause because I've yet to buy my first property. Can someone please help me with round numbers and explain how pulling money out of a deal can affect cash flow at the end? I'd love to see numbers from the original mortgage through to the refinance stage. I just don't fully understand when I hear on podcasts "We couldn't pull all of our money out or we wouldn't cashflow."

Thanks in advance for any help. I'm really hoping to have an "Ah-ha!" moment.

Zach Lemaster · Answer

Best recommendation right now is a HELOC instead of cash out refi.  It's variable rate, but only pay when you use it.  Certainly the best option with high rates.  Otherwise you could sell and 1031 as well.

Jason Wray · Answer

Eric,

Two scenarios and the benefits of each would be if you do pay all cash there is "No title seasoning" so another words you do not have to wait (6 months required) to refinance and pull cash out. You can take up to 80% of the purchase price plus any renovation/repair costs (with proof of receipts) same month you buy. That is a benefit of paying all cash because its speeding up your working capital to go out any buy another rental which is the a big factor in building doors.

Cash flow is calculated in the beginning as well as your ARV potential to see how much you can put in and how much you can take out.

So on each scenario how do you pull money out and cash flow its simple you do the math before you buy the property. I see so many investors buy a home and then start thinking about renovations but find out that the renovations do not equal a high enough LTV to pull out enough cash. A primary home allows you to take out 80% LTV or 90% CLTV, Investment property 80% LTV if you paid all cash and only 75% LTV if you have a mortgage (after 6 months of ownership)

Do not buy a home in todays market and think I can put on a new roof, gut the home and put in new cabinets and floors and the home will have a higher ARV. Appraisers are extremely tight now with new rules in most cases if you are not expanding GLA/sqft you are not adding value. Talk about the comparable sales in that neighborhood with both a seasoned real estate agent and a seasoned Banker/Loan Officer.  Build a good team so that you have tools and resources to help you along the way instead of trying to figure it out solo.

This way you can map out your main goals and run the numbers in advance to see what is selling and what comps you can use to gauge an ARV for the Max LTV. When you refinance a property other than cash out, a rate buy down may also be a key factor.  Rates are higher but if its a long term rental a rate buy down may help cash flow and pay for itself in 24-36 months.

Example of numbers:  If you pay all cash $100K all cash allows you to pull out $80K no wait same month.  $80K mortgage you can elect an I/O interest only 7.75% $516.67 a month I/O plus T&I ($140) $656.67.  rents $1200 a month ROI $543.33 prior to scenario costs.

You have $80K cash from all cash previous purchase you got back through delayed financing similar to a cash out refinance.  Now you use a mortgage but put down 15% target a multifamily 2-4 multifamily with $80K puts you into the $250-$350K buying range.  Many states like Ohio, Indiana, TN, FL, etc you can find a duplex or tri-plex for under $300K.  Again scenario math 2-3 doors bring in on average depending on state but use $1200 a door x 3 $3600 a month.

Mortgage on $300K X15% ($45K)down $255K x 7.75% I/O $1,646.88 a month. plus T&I ($316) $1,962.88 minus $3600 =$1,637.12 ROI factor in your scenario costs.  Now this is starting off with having $100K cash you can go from 1 property to a multifamily within 2 months. After DP $45K plus closing costs you should still have $30K left over for another DP or renovations.

After the second property you have to evaluate the ARV/equity on both properties to see how to pull out more cash to then use that as a Down payment to make the next move if you used that last $30K as renovations.  But if you did renovate either home you can use $30K as a 15% DP on another home to buy.

There are a lot of variables based on loan size, number of doors, location, costs, AVR etc...

Alex Hunt · Answer

Hey Eric,Here's the challenge: If you refinance too much, pulling out most of your invested capital, your mortgage payments may become significantly higher, potentially reducing your cash flow to the point where the property is no longer profitable. This is what people mean when they say, "We couldn't pull all of our money out, or we wouldn't cash flow." They've found a balance between maximizing their capital extraction and maintaining positive cash flow.

The key is to carefully assess each property, taking into account your investment goals, the local market, and the potential for rental income growth after renovations. Make sure your refinancing terms align with your long-term cash flow objectives. It's a balancing act, and sometimes it may be more advantageous to leave some capital in the property to ensure consistent cash flow.Feel free to send me a PM. I can take a look at the property with you. Thanks,

Alecia Loveless · Answer

@Eric Dumais Hi Eric, another scenario to consider is one which I recently did where for the sake of simplicity let’s say I paid candy for at $400,000 for an 8 unit. Rents were under market and I’ve now raised them, renovated and done a value add which is essentially like a jacked up BRRRR on steroids. My property is now worth $800,000.

This is a real life scenario.

I could theoretically take out 80% if I refinanced it or about $640,000 but unfortunately even though I’ve raised the rents significantly to almost market value, they just won’t support a $640,000 mortgage at the current rate I got quoted of 7.75% along with the other expenses.

So I’m stuck being able to take out about $75,000 more than my original purchase price to still have some cash flow and be able to pay the new mortgage and expenses.

Alfath Ahmed · Answer

I do a mixture of all strategies from house-hacking, to doing BRRRR deals, and if a BRRRRR does not make sense, I flip the deal. I have even raised private capital to buy multi-family at 4-cap and sell at 8 to 9-cap.

BRRRR deals are possible but I would look off-market by cold-calling and targeting areas that are posied for growth. Understand ARV comps and take 70% of that.

A typical cosmetic rehab on a SFH is $30k-$40k.  I would subtract this number from your 70% ARV and that should be your goal to purchase. This way you will most likely cash-flow.

Eric Dumais · Answer

I really appreciate you spelling it out like this. I now understand when you pay with cash that you're just borrowing money against your house and you now have a mortgage. So "pulling money out" is just taking a loan.

But to continue with my questions how would this work/change if you didn't buy the house in all cash? If you only put 20% on a 100k house? When you refinance you don't have to pull out all of your money obviously so I guess the part I want to understand is how to do you do the math on finding your limit for cash to pull out?

Andrew Syrios · Answer

Just take the numbers you have without debt and then add the debt service in. So say, for example, the property is worth $100,000 and you can get a $75,000 loan at 7% interest amortized over 25 years.

Put that into a mortgage calculator and you get $530.08/month. So if your average monthly cash flow was $600 before, then now it's $69.92/month. Of course, you also need to look at debt service coverage ratio because banks generally won't lend below a 1.2 DSCR. So you might (will likely) get a lower LTV on your loan in this interest rate environment.

John Chong · Answer

You'll have a new PITIA and interest rate when you refi. The new PITIA will affect your cash flows.

Theresa Harris · Answer

The differences between an old mortgage and a new one won't be as big as the numbers in JD's example, but will depend on the interest rates of the two loans as well as the amount of money you are borrowing (ie initial loan and refinancing).  You may also have costs associated with refinancing that you need to factor in.  For many people, they got mortgages are low interest rates (eg 3%- $473/month for a 25 year mortgage of $100K) and even taking that same loan amount at today's rates (eg 7%-$700/month).  When many rentals are only cash flowing a small amount, that $227/month difference adds up.

How does pulling money out affect cash flow?

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